driving efficiency through strategic procurement
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Delta Partners Perspective Driving efficiency through strategic procurement January 2010 The successful implementation of strategic procurement can help organizations improve their EBIT margins by 4-8 p.p.TRANSCRIPT
January 2010
The Delta Perspective
The successful
implementation of strategic
procurement can help
organizations improve their
EBIT margins by 4-8 p.p.
Driving efficiency through strategic procurement
Authors Javier Alvarez – PartnerLorenzo Campos – Associate Partner Inken Lasar – Senior AssociateDelta Partners Intelligence Unit
Introduction
The global financial crisis has reshaped
strategies to increase overall operational
efficiency among telecom operators
especially in the Middle East and Africa.
Operators are required to increasingly
focus on an improved bottom-line to
ensure funding for future expansion.
Such conditions make procurement
one of the vital efficiency drivers for
operators. Strategic procurement is
more than just squeezing suppliers,
but it is instead an overall change in
the purchase approach. This enables it
to make the transition from an ‘ad-
hoc’ support function to a long-term
strategic approach. To maximise this
shift, it is essential that the approach is
adequately supported by analytics and
a facilitating environment within the
organization.
This paper illustrates Delta Partners’
perspective on how the procurement
Key hIghLIghts
Two thirds of all costs of a telecom •operator are within the area of influence of a procurement function
Strategic procurement can help •organizations improve their EBIT margins by 4-8 p.p.
The successful implementation of •strategic procurement depends on three pillars – defining a sourcing model, organizational model and overall governance
functions, traditionally seen as a mere
administrative and control unit, can be
transformed into a ‘change-agent’ for a
telecom operator. This can be possible if
the organization is willing to transform
its existing business models towards a
more integrated one for value creation.
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This involves adopting a long-term
approach, the buy-in from the rest
of the organization as well as the
presence of analytical capabilities and
skilled negotiators in the procurement
department. Therefore, the key
question that needs to be answered is
what is the correct sourcing strategy
and how does this translate into
efficiency improvement? There is no
straightforward formula to the correct
sourcing strategy – especially since what
is applied successfully in one market
or operation may not work in another.
The most important aspect in strategic
procurement is to carefully account
for potential sourcing approaches
considering the operator’s corporate
and commercial strategy, the strategic
importance and financial relevance of
the item to be sourced and the supplier
market conditions.
Despite the financial downturn, regional
players have witnessed an overall
subscriber growth and remain on the
lookout for expansion opportunities.
However, operators would have to
adapt their operating models to the
more demanding environment of limited
capital, high competition and need
towards synergy realization.
Limited access to capital
Access to capital for expansion plans has
become more difficult and expensive
due to higher risk-aversion from the
banking industry. Only companies that
can demonstrate extraordinary market
What is Strategic Procurement? Strategic procurement consists of applying the correct sourcing strategies for each element within a sourcing category. In telecommunications, the four major categories are Network, IT, Sales & Marketing and General Administration.
performance, in terms of top line
growth as well as bottom-line efficiency,
are allowed access. In this environment,
CAPEX and OPEX optimization is
essential to ensure each dollar invested
delivers the highest return.
highly competitive market
Similar to comparable European
markets, heightened competition and
increased pressure on margins across
maturing Middle Eastern markets
requires increased cost efficiency
strategies. In Africa, cost efficiency
has historically played a much more
important role than in the Middle East.
This is due to the higher proportion
of low-value users which makes ROI
challenging to achieve.
synergy realization
After intense consolidation activity in
the emerging mobile market sector,
driven mostly by strong and committed
regional players such as Zain, Etisalat,
Orascom, Qtel and MTN, the pace is
slowing. Operators are facing a real
challenge in realizing cost synergies
that were projected in ambitious
business plans. In summary, emerging
market operators would move away
from a time when they were merely
focused on expansion to generate
shareholder value, to a time when they
focus on time-to-market and efficiency
improvement. All of these require
that the procurement function plays a
central role.
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This is achieved by identifying key
saving potential areas and driving
innovative sourcing models which can
enable operators to reinvent their cost
structures. For example by turning
traditionally fixed costs into variable
through outsourcing models. While not
all cost categories can be influenced
by procurement, typically up to two
thirds of all costs of a telecom operator
are within the area of influence of a
procurement function. Focusing the
resources on the most relevant sources
of cost, the procurement function
can support the operator in achieving
How can Strategic Procurement contribute to effective value creation?
Strategic procurement is a major tool to conceptualize new business models seeking efficiency improvements.
EXHIBIT 1: SAVINGS POTENTIAL THROUGH STRATEGIC PROCUREMENT - IMPROVE EBIT UP TO 8 PP
Source: Delta Partners Analysis; Note: Cost categories based on benchmarks from MEA mobile players. Savings are from Delta Partners selected projects
critical efficiency improvements in the
short term. This is achieved by direct
or indirect manipulation of the key
purchase levers of 1. Price of goods and
2. Volume of purchase.
Price of goods1.
With the support of other business
units, procurement is assigned the
responsibility for evaluating, comparing
and (re)negotiating prices with vendors
across all business lines, based on initial
offer and best available market rates.
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Volume of purchase2.
Following up on each business
unit’s needs, procurement should
concentrate on requests, centralize
relations with vendors and achieve
discounted prices through improved
negotiating power. In parallel,
procurement should also internally
strive for enhanced consumption
policies and control mechanisms.
Positive results by short-term actions and
tools can be taken to the next level with
the support of a strategic procurement
function focused on the improvement
of overall sourcing and purchasing
processes. Based on Delta Partners’
experience, it was observed that the
potential for value creation ranges
between 4 - 8 pp of EBIT margin for a
typical emerging market mobile player
(As shown in Exhibit 1).
Case study: A mobile operator that
had historically relied on local fuel
distributors decided to broaden its
horizon by considering international
importers in order to reduce its
dependency on local players. This
helped it to improve security of
supply, and bring down overall rates
How do organizations implement Strategic Procurement?
The successful implementation of strategic procurement is built on the three pillars of: 1. Sourcing Model 2. Organizational Model and 3. Governance Structure (As shown in Exhibit 2).
Sourcing Model1.
A robust sourcing model is essential
for the overall success of strategic
procurement since it is required for
each of the four main categories
of telecommunications - Network,
IT, Sales & Marketing and General
Administration. In order to procure
different items under each category, the
sourcing model needs to delve deeper
into the aspects of spend analysis,
supplier relationship management, and
category plans.
1.1 Spend analysis
The first step towards a strategic
approach in the procurement function is
the achievement of transparency across
the organization on what is bought by
whom, the type of approvals required
and its regularity.
It is essential that the procurement unit
possesses people with an analytical
profile in order to perform regular spend
analysis and reporting. For instance, just
by installing transparency about spend,
and channeling every purchase order
through the procurement department
(empowered for the entire negotiation
process), a mobile operator was able to
reduce annual OPEX spend by 2%.
1.2 Supplier relationship management
The next step in the sourcing strategy
is to research available sourcing options
in the supplier market, which can
either be from local or international
vendors. A detailed assessment of the
Case study: Backed by Delta
Partner’s advisory support, a MEA
mobile operator was able to reduce
its network CAPEX by 35%, through
centrally renegotiating network
elements. This was based on a
competitive bidding process and
closure of a framework agreement
for the forthcoming years.
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different supplier options should be
undertaken, weighing various criteria,
such as price, lead time, quality, on-site
support and long term conditions,
amongst others. Here, procurement
personnel should use their creativity in
exploring alternative supply options.
A supplier pre-qualification process to
ensure they comply with requirements
aligned with procurement strategy and
policies is also necessary.
1.3 Category plans
The implementation of a successful
sourcing strategy is also based upon
effective category planning. For all the
items within the four categories – i.e.
Network, IT, Sales & Marketing and
General administration, the elements
of vendor strategy, relationship,
price structure, payment terms and
delivery terms play a critical role. This
entails being clear about source of
purchase (such as original equipment
manufacturers, wholesalers or retailers),
use of one/multiple suppliers, short or
long-term basis, credit terms or cash
and decision on delivery period. As a
rule, the overall framework needs to
contain all the items requested from
Case study: Whilst supporting
a MEA operator in the bidding
process and selection of preferred
vendors in the region, Delta
Partners helped create a platform
that could achieve annual savings of
30% and 15% on SIM and scratch
card purchases respectively.
the suppliers as part of the provided
quotation, along with a long-term
outlook of annual volumes as well as
re-negotiation cycles. This needs to be
formalized in writing and made known
to respective procurement employees.
Organizational Model2.
The introduction of strategic
procurement within an organization
has to be carried out in a phased
approach. Firstly, a capable and
empowered procurement organization
needs to be put in place. Most modern
organizations choose the category
management principle, whereby each
procurement employee is responsible
for a certain category.
However, strategic procurement is
not necessarily linked to a certain
organizational model. Regardless of
the operators’ set-up, procurement
employees should be specialists with
strong experience in the area and
possess not only sound quantitative and
analytical skills but also the ability to
communicate and negotiate effectively.
Above all, integrity is a non-negotiable
EXHIBIT 2: IMPLEMENTATION OF STRATEGIC PROCUREMENT
Source: Delta Partners Analysis
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requirement. In order to be effective,
the procurement organization must
be empowered by the company’s
management. Empowerment is done
by choosing an adequate reporting level
within the organization which is most
likely the Chief Financial Officer (CFO).
However, this is not a hard and fast rule
and should be adapted to local market
conditions. For example, in an emerging
market, where a quick network roll-
out was required, a mobile operator
appointed the Procurement Director
into the Executive Committee as a
C-level executive, i.e. the CPO (Chief
Procurement Officer). This reflected the
importance the organization bestowed
upon procurement as a crucial function
especially when time-to-market was
critical.
Governance Structure3.
An adequate governance system is
vital to reap benefits from strategic
procurement, as strategic procurement
is often oriented at achieving savings,
and can conflict with the interests of the
business units. An escalation process
to senior management needs to be
considered and implemented to address
such conflicts. The governance system
should also include mechanisms to
manage the relationship with suppliers.
In this way, new trends and potential
issues can be detected as early as
possible and new sourcing models can
be designed to react accordingly.
Rather than strictly looking at P&L
effective cost reductions that compare
to last year’s spend, procurement needs
Illustrations of strategic Procurement Best Practices
target pricing:• Instead of using a competitive RFP process, a mobile operator shifted to the ‘target pricing
model’, setting its suppliers a price target for a certain product category, leading to maximum transparency. This
price target was derived from overall world market price, accounting for a ‘mark-up’ to reflect additional costs
(Example transportation, distributor margin etc.). The overall savings achieved was estimated to be around US$ 1
Mn per annum
Reverse auction:• Standardization of P&S request, maintaining price as the only variable to compare suppliers
against. Reverse auctions can also be conducted over the Internet, further reducing time and effort. For example, a
MEA operator identified new integrated site maintenance providers through a competitive reverse auction process,
leading to 40% cost reduction
Volume bundling:• Centralized procurement at Group level allows for standardization of Products & Services (P&S)
across all operations as well as quantity discounts. A mobile operator who bundled its CAPEX at Group level was
able to reduce network CAPEX by 35%
sourcing of different components:• In some situations, it might be preferential to source different components
from different suppliers instead of the whole and centralized package. This can lead to the most competitive offers
from different sources. Furthermore, a global sourcing framework that caters to the operator’s footprint, can
further contribute towards significant savings
Preferred supplier:• Electing a preferred supplier using a pre-defined set of parameters ensures quality control as
well as helps to obtain preferential rates. Mobile operator was able to get a EDGE upgrade for free from a vendor
in return for the award of the exclusive contract for 3G network roll-out in a European country
Discount by vouchers:• In certain instances, an operator can negotiate for discount vouchers from the vendor at
the time of placing a large order. These can then be used in subsequent purchases
Long-term contracts/ versus spot buying:• For volatile supply markets (e.g. fuel), it might be beneficial to enter
into a long-term agreement with a fixed price for a certain period to hedge against expected price increases
Outsourcing:• Delta Partners supported a mobile operator in outsourcing its call center function to an external
service provider, resulting in savings of around 10% of operating costs, alongside increased service quality
Backwards integration:• If the product/service procured is of high importance for the operator (e.g. content
providers), close co-operation with a specific supplier or even backwards integration might be a viable strategy
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ConclusionSince the global financial crisis
surfaced over a year ago, MEA
telecom operators have slowed
down their aggressive expansion
plans due to limited availability of
funding. Meanwhile, the need to
establish synergies and the presence
of increased competition in existing
markets continues to exert pressure
on margins. In this environment,
strategic procurement has proven
to be a powerful lever in order to
improve overall efficiency. Mobile
operators that have consciously
invested in the re-orientation of their
scattered purchasing units, changing
their pure operational spot buying
approach into a long-term, integrated
strategic one, usually creating a
centralized group function as driving
force are bound to succeed.
Delta Partners has had significant
exposure supporting operators across
emerging markets in the establishment
of a strategic procurement function.
Based on its experience, savings of up
to 4 to 8 p.p. in operating profit (EBIT)
can be achieved by those operators that
succeed in this process. They take the
initiative to transform the procurement
function into a “change agent” that
works hand in hand with business users
to redefine traditional operating models
for value creation.
Operators willing to adopt
strategic procurement within their
organizations need to concentrate on
three key dimensions:
Definition of strategic sourcing •
models for key procurement
categories, which requires detailed
spend analysis and the development
of detailed category plans as
key inputs to select the most
appropriate strategy
Creation of a capable and empowered •
procurement organization wherein
each procurement employee is
responsible for a certain category such
as Network, IT, Sales & Marketing and
General administration
In-depth review of the procurement •
organization and the definition of a
governance model that covers both
procurement specific issues as well as
the interaction with business users to
ensure integrated decision making.
Organizations would also need to
develop long-term partnerships
with suppliers, by enhancement of
market intelligence through rigorous
supplier research, clear vendor pre-
qualification criteria and periodic
evaluation & feedback mechanisms
As the world begins to look beyond
the current crisis and take the first
steps towards recovery, operators
mastering strategic procurement will
be able to resurge stronger, leveraging
this sustainable competitive advantage
to strengthen their position in an
increasingly tough environment in
emerging markets.
its own savings calculation methodology
to access true savings. This should be
auditable and supported but at the
same time adequately incentivize the
employees. Delta Partners has developed
its proprietary savings classification
methodology, accounting for different
type of savings depending on the nature
of the effective purchase process.
hard savings: This includes savings
registered against historical spend
data and thus directly reflected in the
P&L account.
soft savings: These include cost
reductions which cannot be calculated
using historical data and therefore do
not create a direct impact on the P&L
accounts. However, they minimize the
negative impact to the bottom-line
that a higher expenditure for a certain
item would have caused. Example. Price
reductions through negotiations during
the purchase of a new item.
Cost avoidance: This includes cost
reductions that have been achieved as a
result of changing product specifications
(scope changes) due to the involvement
of procurement function. Registration
of cost avoidance implies a negotiation
process between business users
(responsible for the request) and the
procurement department (responsible
for the purchase).
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